Val-
My DS is nearly 6 and started reading about a year and a half ago, but very slowly. He was "ready" to read since he was 2- knew all his letter sounds, blends etc but wouldn't put them together. He has always been a phonetic reader and had very few sight words until a few months ago. It drove me nuts because it would take forever to read one sentence.
He is much like your DS still. He whips through a Frannie K Stein or Pokemon chapter book but struggles with a level 1 easy reader. Small words like 3-4 letters still throw him for a loop sometimes, even if he's seen then 200x. He reverses letters- on becomes no, or switches letters- that becomes what. Yet on his WOW words wall- he has things like scientist, championship, nominate, herbivore etc. (We have a wall of big words he's figured out the first time he saw them- it helped us motivate him to move to a new level)
I've just let it go and decided that he just reads fast and things get jumbled. His comprehension is not being hindered by it at all. I've heard from friends that this actually gets better when they begin reading silently. DS still reads everything aloud.